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Intel (NASDAQ:INTC) finally did it -- it has managed to win a significant portion of the modems inside Apple's (NASDAQ:AAPL) newly announced iPhone 7 and 7 Plus smartphones. Not only are Intel's modems expected to ship inside iPhones internationally, but a good chunk of the phones that ship in North America -- in particular, those sold through carriers that operate GSM networks -- will have Intel Inside, too.

This is an excellent achievement on Intel's part and is far and away the biggest success that the chipmaker has ever enjoyed in the mobile-device market.

However, this win will be for naught unless the company is able to follow it up with a pipeline of competitive modems that ultimately find their way into future iPhones. And I say "iPhones" rather than "smartphones" because the rest of the smartphone market uses single-chip integrated applications processor and modem solutions, in contrast to Apple, which uses standalone modems and applications processors.

After doing some digging, I have managed to learn some interesting technical tidbits about a next-generation Intel modem.

Intel finally bringing the modem in-house

Intel doesn't like to advertise that it hasn't manufactured any of the cellular modems it has released thus far. Instead, they're built by contract chip manufacturers on relatively mature (read: old) chip manufacturing technologies. For example, Intel's prior-generation XMM 7260 and the current XMM 7360 modems are manufactured on a 28-nanometer technology.

Intel's largest competitor in this space, wireless-chip giant Qualcomm (NASDAQ:QCOM), has been shipping modems built on a more advanced 20-nanometer technology for quite some time. And its latest modem, the Snapdragon X16, is manufactured in an even more advanced 14-nanometer FinFET technology, according to industry analyst Patrick Moorhead.

Newer manufacturing technologies tend to help improve power consumption and allow chip companies to pack more features and technologies into a given area relative to older ones.

Intel hasn't disclosed the technology in the XMM 7480, the follow-on to the XMM 7360 used in the iPhone, but the lack of disclosure likely indicates that it, too, is a 28-nanometer product. It would appear, though, that everything changes with the XMM 7560 modem that the company is likely to ramp up in support of the 2018 iPhone.

A 14-nanometer Intel modem is coming in 2018

Take a look at the following excerpt from an Intel modem engineer's LinkedIn profile:

Image source: LinkedIn.

From this, we're able to learn a few things about this upcoming modem and, potentially, future modems:

Intel is actively developing a modem on its 14-nanometer manufacturing technology.

Development of this modem began no later than in January 2015, which suggests that we're looking at XMM 7560 here -- the modem that Intel should be able to ramp up into the 2018 iPhone -- assuming Intel wins that particular design, that is.

The engineer says this modem is the "first Intel LTE slim modem on 14nm," which suggests that Intel is likely to stick with this manufacturing technology for at least one more modem following the 7560.

The modem itself features an embedded Atom core, something that Intel's former mobile chief indicated a few years back was going to happen.

Implications for Intel's business and financials

There are several potential implications that these facts could have on the financial results of Intel's mobile business. The first is that by moving to a much more advanced manufacturing technology, Intel should be able to deliver significant power consumption enhancements relative to its prior-generation modems.

Given that Intel seems to be primarily targeting Apple's iPhones, and given that Apple probably wants to be able to lower the power consumption of key components as much as possible, this could help in shoring up Intel's competitive positioning.

Additionally, Intel should be able to save some money in a couple of ways with this new modem. If the XMM 7360 and XMM 7480 still use embedded ARM Holdings processor cores, then the move to Intel's own Atom cores should mean that it no longer has to pay any royalties to ARM. Though those royalties probably weren't huge to begin with, every penny counts.

More importantly on the cost front, the transition to in-house manufacturing should mean a significant manufacturing cost savings. With Intel's current modems, the company needs to pay a third party to manufacture those chips.

That third party is probably collecting a 40% to 50% gross profit margin on the chips -- that's profit on top of the raw manufacturing costs of the chips. By moving future modem production in-house, Intel can instead keep those margins for itself, dramatically enhancing profitability.

It's also worth noting that by the 2018 timeframe when these modems are likely to go into production, Intel's 14-nanometer technology should be extremely mature and cost-effective.

In a nutshell, this move should help to dramatically improve the profitability of its standalone cellular modem business. In the scheme of Intel's business, this isn't going to be a financial game changer, but every dollar counts.

Ashraf Eassa owns shares of Intel and Qualcomm. The Motley Fool owns shares of and recommends Apple and Qualcomm. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Ashraf Eassa is a Senior Technology Specialist with The Motley Fool. He's an experienced and passionate technology stock analyst and investor with focus on semiconductor companies. He holds a B.S. in Computer Science as well as in Mathematics from the University of Vermont. You can write to him at aeassa@gmail.com -- he doesn't bite!